McKinsey says Asian banks face triple threat to profits

Banks in the Asia-Pacific region are in for a whole mess of hurt if they don’t change their ways, said a well-respected New York business consultancy.

Well, McKinsey & Co. actually said the banks face “a powerful storm” if they don’t read the tea leaves. By 2018, the consulting firm expects the industry to see return on equity (ROE) take a hit if it doesn’t address the triple threat of slowing economic growth, technology disruption and weaker balance sheets.

The McKinsey study said ROE for Asia-Pacific lenders had fallen to 14% in 2014 from the previous year’s 15%. That figure may fall to “single digits” if banks don’t take action, said Joydeep Sengupta, one of the report’s authors, in a phone interview with Bloomberg.

The consulting firm analyzed 328 banks and predicted profit growth may slow to below 4% annually between 2016-2021, down from about 10% in 2011-2014, said Sengupta.

Banks in the region have “seen extraordinary growth” over the past decade, said Sengupta. “At this point in time, we would say we’re at the end of the golden era. There is a trinity of threats which we are seeing.”

Asia-Pacific banks have accounted for almost half of global banking profits each year since 2009, according to the report. In 2015, the region’s lenders represented 46% of the $1.1 trillion in after-tax earnings generated by the industry worldwide, said the report.

The decline in China’s economy is dragging down the whole region, according to the report. This has led to weaker lending growth and surging loan defaults. Last year, stressed assets in China, India, Indonesia and Japan climbed to almost $400 billion, according to McKinsey.

The firm said banks need to build up their digital capabilities to fend off rising competition from start-ups and more established digital companies including Alibaba Group Holding and Tencent Holdings.

In addition, the 1.1 billion Asians without formal banking relationships remain a huge untapped opportunity for the banks, said McKinsey.

“The reality is that doing things the way you do will create significant challenges,” Sengupta said. By addressing these, “there are opportunities which are hitherto untapped, but significant and large, that banks can pursue.”